Abstract

In recent years, there has been an increasing interest in the voluntary disclosures in the audit committee report by different stakeholders such as corporate governance organizations and institutional investors. Based on the different requests for enhanced audit committee disclosures, the SEC issued a concept release during 2015 proposing several enhancements and requesting public comment (Securities and Exchange Commission (SEC), 2015).
In this dissertation, we investigate the voluntary disclosures in the audit committee report. The purpose of our study is twofold: 1) to analyze the comment letters to understand "investors' needs" in the context of the audit committee disclosures, 2) to investigate the association between voluntary disclosures in the audit committee report and earnings management, and the voluntary disclosures impact on the external environment. The first essay analyzes the comment letters by using a framing analysis. We aim to understand how each respondent category defines the current audit committee disclosure requirements in fulfilling "investors' needs." We compare and contrast the respondents’ frames and analyze their discourse. The second essay is composed of two studies and considers the top US Bank Holding Companies (BHC). We study the association between the voluntary disclosures in the audit committee reports and banks' earnings quality. Also, in this study, we analyze the impact of the voluntary disclosures in the audit committee report on the implied cost of equity and financial analysts' forecasting properties.
The results reveal that there is a wide variation among respondents in defining “investors’ needs” and how they argue to convince the SEC to adopt their point of view. Also, the discourse analysis reveals several issues at the corporate governance level that require the SEC attention. As for the second essay, the results show that there is a positive association between voluntary disclosures and earnings management. In our view, it implies that audit committees are engaged in impression management. Also, the results suggest that there is a positive relationship between the voluntary disclosures and cost of equity. It implies that the investors are able to know that the voluntary disclosures do not reveal strong performance by the audit committees and as a consequence, they will require a higher rate of return. Finally, for the financial analysts’ forecasting properties, it seems that they have learned that these voluntary disclosures are impression management. They are able to make better forecasting as the results suggest a negative relationship between voluntary disclosures and forecasting errors and forecasting dispersion.
Overall, our results have practical implications for the regulator and policy-makers. The framing analysis of the comment letters provides evidence about the need to have a common understanding of the “investors’ needs” in the audit committee disclosure context. The qualitative study is focusing on “investors’ needs” which is a critical concern for the SEC. Also, one of the regulator’s goal is to ensure that investors maintain confidence in financial markets. Our results show that audit committees engage in impression management. This practice can have bad consequences on investors’ confidence and require the SEC intervention.